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The tax system in Hungary

Features of the tax system and taxation rules of companies and individuals in Hungary in 2020


Basic information about Hungary

The currency used is the Hungarian Forint (HUF) in the absence of currency control.

In Hungary, GAAP-type financial statements are used mainly and accounting principles also adhere to this position. However, some Hungarian companies may choose the principle of IFRS to create financial statements. This mainly applies to organizations that are financial institutions, or if the company issued its shares on the stock exchange for trading. Each company must annually submit to the appropriate authorities a detailed report on all financial transactions and taxes. In this case, the currency used can be in the form of Hungarian forints, or any others, subject to certain conditions that differ for each specific case.

The main actors are limited liability companies (Kft), public limited companies (Nyrt), private companies and organizations with limited liability (Zrt), as well as foreign branches.

Corporate taxation data:

Bid amount

The size of the put bet with the corporate income tax

9%

The tax rate for the branches

9%

Tax rate when accounting for the basic capital gain of a company

9%

Resident status

A company receives these privileges only if the organization’s activity has been registered in Hungary or has a local control place within the country.

Basic status

In this case, residents are subject to special income tax, regardless of geographic location. Companies that are not residents are taxed on income received in Hungary. Each branch as well as subsidiaries also falls under this tax system. If the head office of the company is located in a country not specified in the contract, then additional measures may be applied to the organization and special adjustments may be made.

Taxable profit

Special corporate tax is deducted from the total profit of the company indicated in the accounting. In this case, all commercial and additional costs are taken into account in the preliminary calculation of accounting.

Fixed tax rate

Concerning corporate income tax, this value is 9%.

Income tax

Usually for different institutions and organizations an individual system of calculating income tax rates is used depending on the type of activity and annual financial turnover. For example, in some cases, the total profit of the company is taken into account, while in other situations, the total assets belonging to the organization are considered.

Minimum tax as an alternative

Under certain circumstances, the amount of payments is considered individually and can be changed.

Taxation of dividend income

If the dividend income is received by a Hungarian company, it can be exempted from this type of taxation. However, non-resident companies must make payments that are controlled by a special organization (CFC).

Tax on the growth of profit

In this case, the income received by the company is subject to the usual tax rate of 9%. However, these payments can be avoided under certain conditions, for example, if there is a so-called exemption from participation. Non-resident companies are also exempted from payments, in which capital gains from the sale of shares and bonds are recorded. The situation may change if the following factors are decisive:

  • the shares are owned by a company specializing in the real estate market;
  • the corresponding clause is present in the agreement with the resident shareholder with a fixed rate of 9%.

Compensation for losses

In case of tax losses, up to 50% of the total profit of the previous financial report for the year can be compensated. Like a deferment, you can transfer losses that occurred in 2015 to 2030, but later dates (after 2015) have a deferral term of not more than five years. The FIFO system is used as the basis for compensation and is also applied to companies we cross-merge or take over by another organization.

Tax incentives for foreign citizens

Hungarian law implies certain tax incentives and freedoms, as well as credit limits to increase passive income. In the absence of an additional tax agreement, regional authorities can provide organizations with a loan to pay the foreign tax debt.

Freedom from obligations

This privilege is granted to persons who own a block of shares or bonds and want to get freedom from paying tax on dividends. This benefit also applies to profits from the investment portfolio, if the applicant reported the income to the relevant authorities of Hungary no later than 75 days later. In this case, the taxpayer must have owned a subsidiary of at least one previous year. The same rules apply when selling intellectual property, except that the fact of the transaction should be reported no later than 60 calendar days later.

Incentives

As a kind of support, an entrepreneur can take advantage of tax incentives aimed at developing a business. The size of the incentive depends on the type of activity of the company and the amount of desired investment. However, there are limitations - such an incentive cannot exceed 30 million euros, which in turn is equal to 10 billion forints. Each program participant can take advantage of twice the deduction of R&D costs. Special conditions apply to companies whose income does not exceed 60,000 euros or 20 million forints. Similar payments can also be used as sponsorship for sports organizations and everything related to their activities.

Terms and conditions for global corporations

Payments for a year

A calendar year usually called a tax year, as a rule, corresponds to the current time, however, in some cases, the taxpayer can independently choose the required period. Usually, this period does not exceed 12 months, but in specified cases, it is shorter by several months.

Consolidated Returns

If the organization consists of several subsidiaries or members, you can use the consolidated tax return to file a single tax return from the entire organization, thus saving time and effort both for the taxpayer and the financial authority. One of the advantages of consolidated tax returns is that when filing a single tax return for all members of a consolidated group, all existing tax rebates and prepayments are spent jointly by the group. As a result, the group receives more favorable tax benefits, as well as several other benefits.

Filing an application and paying taxes

Terms and amounts are determined in each case individually. All corporate tax returns must be filed and filed with the agency no later than May 31 of the current year or year that follows the tax period.

Fines system

In case of non-payment or delay in tax payment, the organization will be fined half the amount of the current payment. In some cases, draft evaders are required to pay a fine of 200% of the same amount. Penalty interest is calculated following the base rate of the National Bank of Hungary and is 5% for each period.

Features of individual taxation

Bid amount

The rate for individual income tax

15%

The amount of tax on the overall capital gains

15%

 

Living in the country - an individual or legal entity is considered a resident of Hungary in several cases:

  • the subject in question has Hungarian citizenship;
  • this person has real estate in the territory of the specified country;
  • the company’s business or activity is carried out exclusively in Hungary, or the organization’s main office is located here;
  • the permanent residence of the taxpayer is in Hungary.

A citizen of another country can count on the status of a resident of Hungary if he or she is continuously in the country for at least 183 calendar days.

The main taxpayers

Residents of the country pay tax on their income, regardless of which country they conduct their business in. However, if we are talking about individuals residing in the country, then they pay tax received only in Hungary.

Tax on income received by the entrepreneur

Calculation of the taxable income of a company begins with calculating the net profit/loss in the company's statements, and then various adjustments are made to get the amount of taxable income for the required reporting year. Adjustments are made because some expenses incurred by the company may not be deductible for tax purposes. Besides, a portion of the revenue generated by your company may not be taxed or taxed separately as income derived from a non-profit source.

Fixed-rate

All incomes of individuals and legal entities, in this case, are taxed at a rate of 15%, as well as capital gains.

Tax deduction

In this case, special family tax benefits may be applied, or deductions for the acquisition of real estate property.

Tax incentives for foreign citizens

Foreigners conducting their business in Hungary can expect to be exempted from tax on their active income. Besides, the country's national legislation provides for special credit payments for foreign taxes paid.

Rules for individuals

The tax year also corresponds to the calendar year.

Application status

Each individual must independently keep track of his financial data and submit a report on time to the appropriate authorities. Spouses are treated as separate taxpayers with individual taxation data.

Application and payment process

All tax returns must be submitted before May 20 of the current year or the year that follows the tax. This period may be extended until November 20 under certain conditions and timely notification to the department. Social security tax and personal income tax are paid through withholding.

Fines system

In case of non-payment or delay in tax payment, the organization will be fined half the amount of the current payment. In some cases, draft evaders are required to pay a fine of 200% of the same amount. Penalty interest is calculated following the base rate of the National Bank of Hungary and is 5% for each period.

Requirements

Each taxpayer has the opportunity to request data on the preliminary calculation of taxes in a given period.

Nuances of withholding tax in Hungary

Payout type

Conditions for residents of the country

Conditions for non-residents of the country

 

commercial organization

Private person

commercial organization

Private person

dividend tax

0%

15%

0%

15%

possible interest

0%

15%

0%

15%

required deductions

0%

15%

0%

15%

payment for technical services

0%

15%

0%

15%

No money transfer tax for affiliates.

Dividend tax

If an individual is not a resident of the country, he is not obliged to pay tax on dividends received. A 15% tax can only be applied if the rate has not been changed or reduced following a tax agreement drawn up in advance.

Lack of interest

If it is a legal entity, there is no interest tax. When working with individuals, there is a fixed tax rate of 15%. This rate may be reduced if there is an appropriate tax agreement.

Required deductions

For legal entities this value is 0%, however, for individuals royalties are taxed at a rate of 15%. The rate can also be subsequently reduced under the tax treaty.

Tariffs for maintenance and other services

For legal entities, the tax on fees for technical and other services is 0%. Payments for individuals according to this parameter are equal to 15% only if they are residents of the country. For non-residents, tax can only be applied if the services were delivered through a permanent company in Hungary.

Rules that help prevent tax evasion

Transfer pricing

As a rule, the life cycle of the global transfer pricing policy includes a preliminary detailed analysis of the underlying facts and economic indicators. Evaluation and development of the proposed policy concerning the goals of the global tax planning of groups, detailed implementation, and ongoing control plan, as well as the adoption of protective strategies, given that sooner or later someone somewhere will want to challenge the result. Perhaps the most difficult task throughout this process is the need to maintain a balance between mutually exclusive goals: the ability to maintain a very high level of compliance with the numerous rules and regulations in force in the jurisdictions where the multinational corporation operates, and the need to competitively manage the level of taxes paid globally scale.

Limitations on interest deduction

In Hungary there are restrictions on interest deductions - not more than 30% of taxpayer EBITDA or 3 million euros. Exceptions exist for individual organizations and large companies that have agreed when setting financial accounting goals. Cost overruns can also be carried forward indefinitely, and unused balances are scheduled for the next five years.

Control over foreign organizations

In Hungary there is a special department that monitors the income received by foreign corporations located in the country.

A controlled foreign corporation is a company that is registered outside of Hungary and more than 50% of the voting shares are held by Hungarian "controlling persons" continuously for 30 days or more in a tax year. Ownership can be direct, indirect (through corporations, trusts, partnerships), or constructive (through related parties - family members, property managers, etc.). By “controlling persons” are meant Hungarian citizens, resident foreigners and Hungarian legal entities holding at least 10% of the voting shares in a foreign company.

 “Control” is usually understood as direct or indirect participation in the capital of a foreign company, as well as the provision of a determining influence on such decisions regarding the distribution of company profits. A certain type of income of a controlled foreign company is taxed by the state whose tax resident is the controlling person of such a company, in proportion to its share in the capital of the company.

Controlling entities may not include CFC income in their tax base and not pay the corresponding tax if these incomes are less than the smaller of the two values:

  • 5% of the gross income of the CFC;
  • 1 million dollars.

Besides, income that has already been taxed (for example, dividends distributed by the CFC to its controlling person) is excluded from the tax base.

CFC rules in most cases make it unreasonable to use standard offshore schemes. Also, in almost all countries tax evasion is considered a criminal offense, which, coupled with the international automatic exchange of information, makes the use of such schemes very risky.

Hybrid schemes

If a taxpayer in Hungary concludes a separate agreement with several parties or is himself a link in such an agreement, then the so-called hybrid scheme applies. Moreover, the existing structure is subjected to detailed analysis and all inconsistencies are not tax-deductible. There are no exceptions to the rules, and every taxpayer who makes payments using a hybrid scheme should understand this. If the income received is derived from payment in the EU countries with which Hungary has a special tax treaty, then some benefits and freedom from payments are possible.

Requirements for economic substance

As a rule, an organization registered in Hungary and structured as a tax-exempt company that is not a tax resident outside the country falls under the classification of the “Subject” and will have to take into account the requirements for economic substance outlined in the Law ES, if he performs one or more of the nine categories of “Related Activities”, which include “fund management business”. In practical terms, this means that fund managers who are currently registered as excluded persons can be considered as persons performing the respective “fund management” activities after re-registering as a registered person. Frequently asked questions published by the Hungarian government specify that such entities will only be considered subject to the requirements of an economic entity after January 15, 2020, even if they are re-registered before this date.

Transparency of the information provided

See “Transfer Pricing”.

Export tax

Starting from 2020, even unrealized profits must be recorded to pay taxes if a resident moves his business to another country. Assets that remain domestically taxed. The tax can be divided into five parts and paid gradually following the terms specified in the contract.

Other types of tax payments

Fixed social security contributions

Each employer is required to pay social tax in the amount of 17.5% of the total wage of the employee. Also, the employer is obliged to regularly pay a 1.5% contribution to the employee's vocational training.

Real estate tax

Levied in each region at the discretion of each municipality.

Tax payments on the transfer of ownership to third parties

Owners owning movable property or company shares in Hungary must pay a tax of 4% of the total value of the asset when transferring ownership rights.

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